How to watch the economy & prepare for the next recession

Summary: Our sophisticated information systems deliver a blizzard of economic statistics. I strongly recommend that you ignore them, unless useful to you professionally. Life is short; nothing can be gained by collecting and pondering the snowflakes. Here are some numbers you might find useful to watch. Their only value comes from what you do with them. {1st of 2 posts today.}

(1) Watch the big trend, not the pixels

Watch the trend, not the details. An easy way to do so is to follow the writings of an economist you consider reliable. Even easier is to subscribe to one of the many indexes of leading indicators, such as the Conference Board or the Economic Cycle Research Institute. Or the surveys of economists, such as the Blue Chip consensus, the Wall Street Journal survey, and the Philly Fed’s survey.

I recommend following the Atlanta Fed’s GDPnow page (their algorithm is not better than that of carbon-based economists, but it is just as good and has more frequent updates).

For a broader perspective I recommend the OECD’s composite leading indicators (CLI), available for the major nations and regions. As you can see in this graph of the CLI for OECD nations, the world changes only slowly. Remember the thousands of excited headlines embedded in those slow undulations, and what a waste of time it was to read them (but the 1% would rather you burn time reading trivia than thinking or even worse, taking political action).

(2) The dots to watch

What are the important economic statistics, those that determine the big inflection points? That’s the wrong question, since the answer varies over time. What are the important but potentially vulnerable factors today? Here are my guesses.

(a) Vehicle Sales

Calculated Risk posts this graph each month. Vehicle manufacturing drives the economy. It’s volatile because it is driven by lending; these days increasingly by subprime lending.

The government’s experts assure us that they are in control, just as they did about subprime mortgages right until the crash. With an average loan of $27 thousand and an average maturity of 65 months (i.e., negative equity on the car for much of the loan), a small bump to the economy might crash car sales.

(b) New Home Construction

Construction of homes and apartments — plus their sale and furnishing — provides a powerful but volatile boost to the economy (graph of house starts appears below). America’s slow population growth and aging of the Boomers (big home => retirement home => nursing home) means another generation or two will pass before construction returns to the glory days of the subprime boom. But even small swings matter with overall real GDP growth at only 1 – 3%.

(c) Exports of goods and services

You’ve probably been told that “America no longer makes things” — because lies are the currency of New America. Exports have been a growth story since WWII, not just growing but growing faster than the overall economy (see the below graph). Are you angry that you’ve been lied to? If not, that’s why they lie to you.

$Exports as a fraction of GDP$

Exports are vulnerable to a rising US dollar and slowing foreign economies, both of which we have now. (Remember those hysterical conservatives warning that Obama was debasing the US dollar? Wrong again.) Watch the slowing trend shown in the below graph of the YoY change in exports. Here’s the monthly report, if you like details. Or see the graph at Calculated Risk (ignore the trade deficit).

(3) Summary

Unless done for specific professional need, following economics statistics to stay informed is as useful as watching a cold fireplace. You’ll probably get as much value from the simple methods described here as spending more time to watch the endless stream of numbers (most are either unreliable or heavily revised).

Surrender any thoughts of timing investments — or anything — by using economic statistics to predict events. There may be supermen (or Supergirls) who can do so. No economists or financial whiz-kids can do so.

Watching the cycle can help identify points of high risk. Use them to lower your economic exposures, both personal and business. Ratchet down your debt; boost your savings.